Alaska Air Completes Buyout of Hawaiian: What's Next for Investors?
Alaska Air Group ALK strengthened its position as the fifth-largest U.S. airline by revenues when it completed the acquisition of Hawaiian Airlines for $1 billion in cash. ALK also assumes about $900 million in Hawaiian debt. The acquisition was completed a day after the last major regulatory obstacle to the deal was overcome when the Department of Transportation or DOT cleared the transaction.
The DOT approval did not come without any strings attached to it. The conditions laid down by the regulatory authority include that ALK and Hawaiian Airlines must protect the value of rewards programs as they combine their loyalty programs and maintain the existing service on key Hawaiian routes to the continental United States and inter-island. The carriers agreed to preserve support for rural service, ensure competitive access at the Honolulu hub airport and offer lower costs for military families. Under the conditions laid down by the DOT for the merger, the carriers have to compensate passengers for cancellations and significant delays arising out of their fault.
Following the closure of the buyout, ALK will take over cargo transportation for e-commerce giant Amazon.com AMZN. The DOT approval followed the nod given by the Department of Justice last month. We remind investors that earlier this year, JetBlue Airways JBLU decided against going forward with its decision to buy Spirit Airlines SAVE for $3.8 billion, citing anti-trust hurdles. JBLU’s decision to walk away from the deal came after a federal judge blocked JetBlue’s acquisition of Spirit Airlines on antitrust grounds. Thankfully, no such obstacle came in the way of ALK’s buyout of Hawaiian.
What’s Next for ALK Stock?
With the deal being closed, Alaska Air will now work to obtain a single operating certificate from the Federal Aviation Administration or FAA. Both carriers will, however, operate as separate brands. Until the single operating certificate is received from the FAA, Alaska Airlines and Hawaiian Airlines will function as one organization with two separate airline operations, under two individual operating certificates.
Peter Ingram steps down as chief executive officer of Hawaiian Airlines with Joe Sprague, who served as ALK’s regional president of Hawai‘i/Pacific prior to the closure, replacing him. Sprague leads all aspects of Hawaiian Airlines’ operations until receipt of the single operating certificate. ALK has formed an interim leadership team in Honolulu to oversee Hawaiian Airlines' operations until the two airlines are fully integrated.
The closure of the deal brings in good news for ALK stock, which has already gained in double-digits in a month’s time, outperforming its industry.
One-Month Price Comparison
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ALK Raises Q3 Outlook on Upbeat Summer Travel
Adding to the list of positives, ALK raises its third-quarter 2024 adjusted earnings per share guidance to the range of $2.15-$2.25 compared with the previously guided range of $1.40-$1.60.
Alaska Air has witnessed upbeat air travel demand during the summer season, offering hassle-free service for guests with a 99.3% completion rate quarter to date.
Alaska Air now expects its third-quarter 2024 revenue per available seat mile (a key measure of unit revenues) to be up 2% on a year-over-year basis, an improvement from the previous forecast of flat to positive. ALK continues to expect third-quarter capacity (measured in available seat miles) to increase in the range of 2-3% on a year-over-year basis.
ALK’s earnings per share estimates are north bound as shown below.
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ALK Trading Cheap
From a valuation perspective, ALK is trading at a discount compared with the industry, going by its forward 12-month price-to-sales ratio. The reading is also below its median over the last five years. The company has a Value Score of A.
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Some Headwinds for ALK Stock
Escalating labor costs are hurting ALK’s bottom line. Expenses on wages and benefits increased 7% during the first half of 2024. Evidently, operating expenses were up 2% during the first half of 2024.
Consolidated operating costs per available seat mile (excluding fuel and special items) rose 4% year over year to 10.67 cents in the first half of 2024. For third-quarter 2024, consolidated operating costs per available seat mile (excluding fuel and special items) are expected to increase in the high single digits. ALK anticipates third-quarter 2024 economic fuel cost per gallon in the range of $2.60-$2.70. Our estimate is currently pegged at $2.68 per gallon.
In the current scenario, stock prices of airline companies like ALK are notoriously volatile. In fact, ALK’s beta of 1.59 means that shares are more volatile than the overall market.
Final Words
There is no doubt that the completion of the Hawaiian deal is a huge positive for ALK. The bullish third-quarter guidance owing to upbeat air-travel demand is another tailwind as its cheap valuation. However, rising labor costs and high volatility serve as big headwinds. As such, due to the volatile nature, shares of ALK may not be suitable for investors who are not comfortable with often substantial day-to-day volatility. We believe that investors should not rush to buy ALK stock now until more clarity on the integration process is obtained.
Instead, they should monitor the company’s developments closely for a more appropriate entry point. For those who already own the stock, it will be prudent to stay invested. The stock’s Zacks Rank #3 (Hold) supports our thesis. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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